Net Worth Update January 2015 – Nobleea the Oil and Gas Engineer

Family Income: $145,000 (main job), $30,000 (part time job), $85,000 (wife main job), $10,000 (wife part time job), $14,500 (rental income before expenses)

Goals: Million dollar family net worth before 40, Retirement from primary job at 50 (for me)

Notes: Owns primary house. Owns tear down house across the street currently being rented. (to be torn down for new family home)

We live in Edmonton where incomes are high and housing prices are fairly reasonable. Some may roll their eyes at the high family income and say that a million dollar journey is going to be pretty easy. The thing is that I have a plan to retire at 50 and pursue other interests. My wife will likely continue working until it makes sense to retire with her DB pension as the penalties for early retirement are pretty severe.

We recently bought a tear down property across the street from our home. We will be tearing it down in the spring and building a larger family home. Once we take possession of the new build, our current home will be sold. Someone approached us last month to buy our current home off us when they found out we would be selling in the future.

We travel a lot for pleasure but are pretty frugal otherwise (no cable, coupons, pay and talk phones, dine out or take-out a few times a year). I try to keep our cash balances as low as possible and want every spare dollar going towards debt repayment. I would say our living expenses are low relative to our income. We have tried hard to avoid most lifestyle inflation.

We have a few financial goals for this year including opening a TFSA for both of us and funding with a minimum of $2K each, signing up for additional term life insurance for both of us to top up that which is included in our group plans, and reduce our HELOC balance by 60K.

Since the last update in September, the financial picture hasn’t changed much on the aggregate. The equity markets have not fared well, especially in energy-focused portfolios, though we have made progress on reducing debt by eliminating two loans and the corresponding monthly payments and received a nice bump in the termination value of the pension plan. Without it, we would likely be looking at no change in net worth from Sept to Jan.

We finished 2014 with an increase of $151K in our net worth which we are proud of. I expect our net worth will increase between $100-150K again in 2015. At the current rate, we hope to meet our goal of $1 million in net worth sometime in late 2017 when I will be 39.

On to the net worth numbers:

Assets: $1,138,752 (+2.40%)

Cash: $2,629 (+131%)

Registered/Retirement Investment Accounts (RRSP): $142,866 (-7.30%)

Tax Free Savings Accounts (TFSA): $0 (+0.00%)

Defined Benefit Pension: $88,900 (+87.0%)

Non-Registered Investment Accounts: $9,380 (-69%)

Principal Residence: $458,000 (+0.00%)

Tear Down Property: $375,000 (+0.00%)

Vehicles/Other: $58,450 (+24.7%)

Liabilities: $417,591 (-3.20%)

Principal Residence Mortgage: $0 (Paid off in October)

Tear Down Mortgage: $296,147 (-1.30%)

HELOC: $115,084 (+3.70%)

Car Loan: $0 (Paid off in December)

Credit Cards: $6,360 (+65.8%)

Total Net Worth: $717,634 (+5.40%)

Started 2014 with Net Worth: $566,394

Year to Date Gain/Loss: +26.7%

Some quick notes and explanations to common questions:

The Cash

Cash includes bank account balances in two accounts, plus any gift card balances. We try to keep as little money in bank accounts as possible and make mortgage prepayments with it instead. We use cash flow modeling to predict the maximum amount we can put towards debt today without having a negative balance in the future, taking all one time or non-regular bills in to account.

Loans and Credit Cards

The credit cards are paid off in full every month with no interest due. We put all our expenses on credit cards for points and cash back. As this can be a substantial amount some months, I believe it needs to have a line item in your monthly net worth as it is a liability at that snapshot in time. The HELOC is almost completely tax deductible (small smith maneuvre and downpayment on rental). Considering the tax deductibility of interest, our highest net interest rate on liabilities is 2.24%, with a weighted average rate of 1.79%.

Savings

TFSA’s have not been started yet as all spare cash has been going against the mortgage. Transferring the non-registered investments over would affect the tax deductibility of some of the HELOC.

Real Estate

Our primary residence was purchased in 2008 for $355K. We have put in $110K in renovations since then in a complete overhaul. The house value shown here is based on those two numbers and is conservative relative to what similar homes in the area sell for.

Our ‘rental’ is across the street and was purchased last month for the lot, purchase price $375K. It is currently rented (cash flow negative) and will be torn down in April to start construction on our new home. The next 2 years will be a mess with construction draw mortgages, HELOC balances for some construction costs, messy accounting for a rental that was effectively disposed of after 7 months of rent. We have no desire to remain landlords now or in the future. Once we move to the new home and sell our current home, the plan is to pay that one off in 5-10 years.

Pension/Investments

My wife has a DB pension as a teacher. The balance shown is the termination benefit should she quit from her position tomorrow, net of any taxes. I have a matching RRSP plan through my work. Combined with CPP, we are not worried about retirement income, it’s just a matter of timing. We plan on contributing to my RRSP in order to get the full match but no more, then max out TFSA for investments, and then non-registered investments.

We have pretty substantial unused RRSP contribution room and will likely never use it. Perhaps in the event of a large capital gain, we may contribute some to offset the capital gain taxes. Not listed on the net worth values is our daughter’s RESP, which has a balance of about $3500. We plan on contributing enough every year to get the full CESG grant. The RESP is invested in TD e-series funds in a couch potato portfolio as a family plan.

Vehicles/Other

Just over half of this amount is vehicles. We have a two 2013 model year vehicles, one purchased new, one purchased used. I depreciate their value every month in net worth updates to keep it at just above wholesale value. The two vehicles combined cost us $250/mo in depreciation and repairs. I find that reasonable considering it would be hard to lease a single small vehicle for that price. The “Other” refers to fairly extensive photography equipment (part time business), sporting equipment and personal property.

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I would think it all depends on where in the supply chain Nobleea is employed and with what kind of company (e.g. he may work for the gov’t). Hammered oil prices aren’t going to effect the long-standing big players to the degree it will others. If prices stay at unprofitable levels for an extended period, the vast majority of US shale/fracking plays will be wiped-out, effectively killing the current glut of supply, leading to higher prices once again.

That said, everything in Edmonton & Alberta is powered by oil money, employment and housing market included. There’s bound to be some wreckage.

Speaking of wreckage, the debt load & deviates carried by the fracking industry are truly massive. If you think the 2008 sub-prime disaster was bad, just wait until 95% of those oil loans and derivatives go belly up. Ouch.

Cold Truth: I missed any chance for mitigation. Given how fast the drop happened, and how little warning most got, there wasn’t much chance to react. I would estimate the NW took at 40-60K hit due to the drop in oil prices. I expect that the price of oil could go below 40 in the near term but will rebound nicely in the latter half of the year. One thing I’ve learned about momentum is that things can go longer than you expect and go lower (or higher) than is reasonable. I expect that the energy industry will have some good investments in Q1 or Q2 that will pay off nicely in the medium term.
SST: I work for a service company, our customers are the big (and small) oilco’s. We still have a healthy backorder that will continue until the middle of the year, but that’s only our one product line. Some of the other product lines maybe not so much. I have zero concerns about my position, but talk to me again in 8 months and we’ll see.

Greg, certainly there is a chance that RE here drops quite a bit. I wouldn’t be so concerned with the new home and property, but the existing house will have to be sold at some time. There’s lots of leeway though. I think we’re at 60-65% LTV on the combined places right now and maybe 50% once the current house is sold (assuming prices stay within 10% of now). NW would certainly take a hit though, but it’s not like there would be a cash flow issue.

The fact that Noblea own his principal property outright is probably sufficient to protect him from any serious consequences.

The rental property might could go wrong. If housing prices start dropping (likely by next summer) the banks will get very tight fisted on construction loans as their morgtage portfolios start taking writedowns. Financing the rental teardown and rebuild might not be feasible anymore, particularly to be injecting that much cash when you work in an industry going through restructuring.

The oil correction could be a mid-term issue (5 years). The financial crisis was supposed to take 2 years to clear the chuff. How long’s it been?

Shale oil should never have been profitable. A serious of short term disruptions in Libia, Iran and Syria allowed long-term supply to ramp up while buffering a very short term problem.

It’s funny, nobody saw the down turn in WTI, but now that it’s down everyone is pretending to be an expert at predicting the future price and specifically that it won’t go back up. Just like all the pundits that keep saying to keep out of bonds for the last 5 years because interest rates are going up…

Interesting. Nobleea is the same age as me, has the same net worth, and the same age 40 goal ($1M in total net worth). Income/employment differs significantly. My wife and I are approx $140k on a combined basis. We live in Ontario. No rich DB teachers pension (…just jealous). Employed in financial services and the arts.

Your portfolio is clearly real estate heavy. Congrats on being mortgage free! To date, I’ve been allocating to investments rather than mortgage at 2.25%, so still carry a $100k balance on the house. I want to pay it off in full but just can’t justify. Dividend yields have been good (although the “slashing” has begun….thanks Western Canada!). My energy allocation is not massive, but between that and financials….could be a bumpy ride. I’m getting to a point where I don’t consider real estate to be as important a component of net worth. My total savings are around $450k…. and that feels better to me than whatever the roof over my head is worth (…gotta sleep somewhere!). Given the market conditions, 2015 may see more lump sum mortgage payments …. although….I made most of my significant market gains in 2007/2008….. didn’t follow the sheep then, and I probably shouldn’t follow them now!

Your 2013 vehicle choices are interesting. I love cars, so this is a tough one for me. I could easily spend more. Instead, I buy 4-5 year old higher end vehicles (for a fraction of their original cost), and choose to live close to work which makes wear/tear/fuel costs very minimal/manageable. Sounds like your depreciation of $250 might be a tad conservative. In general, I would nix your “Vehicle/Other” category from you net worth calculation.

Regardless….your incomes will keep you guys way ahead of the game (assuming you continue to be committed savers and wise spenders).

I like your goal of $1M in assets by 45. I think I may borrow that. That would be $1M in investable assets. Definitely doable.

In regards to the vehicles, I think the depreciation is pretty accurate. It depends on the price you originally paid and what it sells for when you dispose. Now obviously, you don’t know what this number is, so I look at what the car would sell for if it were 4 or 5 yrs old now. For example, on the 2013’s, I look at what 2010 model years sell for at the moment (that’s currently a 4 or 5 yr old model). I pick 4 or 5 yrs as that is typically how long we keep our cars. Both vehicles have full warranty for most of that time, so repair costs are minimal. Maintenance costs would be the same regardless and are dependent on mileage driven, so I take those out. They are an operational expense not a capital depreciation. The car we bought new is a brand that doesn’t depreciate a lot and there are very few for sale. Plus we don’t put a lot of miles on that car. The car we bought used was about 45% off it’s selling price new, so most of the significant depreciation is already gone. It’s a high selling model, so there are lots for sale which makes estimating the depreciation curve a simple exercise. The depreciation may be over $250/mo but it’s certainly under $300.

The few quibbles I have, have already been mentioned. You are RE heavy but you already know that. What plans do you have if any to diversify? More stocks or bonds or what have you? What is the timeline to max out the TFSA with stocks?

Mortgage free is huge. I’m trying to be like you and get my debt killed (also like FT) in that regard.

I can’t however be putting everything I own into the house since our mortgage rate is low and I can make more in dividend yield than my mortgage, so investing and killing debt for us is a balance.

With almost $150,000 in your RRSP + DB pension, you are well on your way in your 30s to be FI by age 50.

@John, it an ideal world, it would be easy to turn a $250k salary into $1M in net worth. However, in this society, high incomes typically means higher expenses. In other words, bigger houses, luxury cars to keep up with colleagues making the same amount. Nobleea is doing a great job by actually living within his means and saving a large percentage of his income.

@frugalTrader This is very true, living within your means is very smart and noble. The same could be said for the homeless lad living on the streets picking bottles for income. He as well is living within his means and thus provides about the same amount of motivation and given the same amount of applause for wisdoms handed out.

@Botts — speaking of “the homeless lad”…reminds me of story I read years ago about a homeless man and woman who ended up having a child. The man had enough courage and integrity to put the welfare of his child far above his own and swore he would do at least one right thing for his child. Over the next year he went about collecting enough bottles and cans to the tune of $10,000. He put it all into an RESP for the kid.

Much more of an accomplishment to save up $10,000 when your income and assets are are $0, than to rebuff the temptation of buying a luxury car when your income is $250,000. It’s about controlling your brain, not your wallet.

People of all stripes can be applauded for their motivation and wisdom.